One small step for man, one step too far for the Fed, as US rate cut speculation prompts higher open

50 years ago tomorrow Neil Armstrong took mankind’s first steps on the moon, and uttered those immortal words “one small step for man, one giant leap for mankind” thus opening up an exciting era of space exploration and travel, beyond the beautiful blue marble, that is planet Earth.

On the eve of this momentous anniversary, market participants appear to have similarly out of this world expectations about the prospect for a 50bp rate cut by the US Federal Reserve at the end of this month. This really would be one step too far in terms of what the Fed is likely to do in the next couple of weeks, the only caveat being that the wheels might well come off the global economy between now and then, in order to justify such a drastic move.

These comments by Fed officials, has come after two days of losses European markets and has seen them open higher this morning after a rebound in US markets on the back of some rather dovish commentary from two Fed officials over the prospect of a rate cut by the US central bank, as early as the end of this month.

Fed governor Richard Clarida as well as New York Fed chairman John Williams, both voting members of the FOMC, articulated the case for lower rates in comments made last night, prompting stock markets in the US to reverse course and close higher.

Clarida, in televised comments, made the case for a pre-emptive cut in rates in the event the economy was on the brink of a stumble, while Williams also said the Fed would need to act quickly if the economy were to slow, in remarks that were later clarified by New York Fed officials, who stated they were not indicative of future potential policy actions.

This unusual step by New York Fed officials suggests a concern that markets are getting ahead of themselves in pricing in the prospect of a 50 basis point rate cut at the end of the month.

Despite this clarification investors appear once again to be hearing what they want to hear with respect to future Fed policy actions. While it is looking increasingly certain that the Fed will probably cut rates this month, it is stretching credibility to suggest that they will cut by 50bps, something markets are assigning an almost 50% probability of happening.

Quite simply the data in no way supports such drastic action and while one could also argue the case that a 25bp cut isn’t needed either, it would now be major surprise were the Fed not to act, by at least shaving 25 points of the Fed funds rate on the 31st July.

In company news outgoing CEO of Royal Bank of Scotland Ross McEwan has been named CEO of National Australia Bank, starting April 2020 inviting further speculation as to who his potential replacement could be.

In M&A news Barrick Gold has reached agreement to buy out the rest of Acacia Mining it doesn’t already own for £951m. the improved offer will see the Canadian miner offer 0.168 of its shares for every Acacia share, and a premium of 24.2% over yesterday’s closing price.

Shares in advertising companies have slumped after French agency Publicis scrapped its sales target for this year, prompting a sharp 7% fall in its share price. This has seen WPP shares also slide back as Publicis warned that traditional marketing trends were declining and that its US business was feeling the effects of this more than most. For companies that rely on this traditional method of growth this is unwelcome news, and could well be reflected in other sectors, notably in the case of ITV, who report next week and where there has been similar pullback in advertising revenue over the past few years.

US markets look set to carry on from where they left off opening higher helped by a decent earnings report from Microsoft which saw the US giant report revenues of $125.8bn, a rise of 14% which was driven largely by growth in its cloud computing business Azure. Here we saw a 68% rise in the three months to the end of June, in stark contrast to Germany’s SAP yesterday which saw a slowdown in business in the same area.

The strength of these numbers further cements Microsoft’s position in the $1trn bracket as the world’s most valuable company.

The news from Boeing continues be a headwind for the stock after the company took a charge of $5.6bn in Q2 to compensate 737 MAX customers, and will be reflected in next week’s quarterly results. The share price did rise in afterhours trading on the back of this announcement and has proved to be remarkably resilient in the face of the lengthy grounding of the aircraft, however at some point shareholders may come to the possible realisation that the prospect of this aircraft ever flying again appears to be diminishing by the day, and that this charge is likely to be the first of many.

Boeing has continued to make the 737 MAX, though it has cut its production levels, creating a problem for itself in storing the aircraft. Furthermore the US transportation secretary has already suggested that the aircraft may well not be cleared to fly before the end of the year, and even if it is, as a potential passenger there would surely be a reluctance to get on board the plane even if Boeing were able to get a fix done, such is the damage these incidents have done to its reputation. The question most people will ask is “would you get on board one of these aircraft”, and for me that answer would be no.

After several days of losses oil prices have rebounded after President Trump announced that the US shot down an Iranian drone that threatened one if its warships. While Iran has refuted the claim the action nonetheless is a reminder of the tensions in the region, at a time when oil prices have been on the decline over concerns about slowing demand.

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